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DERIVATIVES AND RISK MANAGEMENT ACTIVITIES | 3 Months Ended
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Mar. 31, 2012
DERIVATIVES AND RISK MANAGEMENT ACTIVITIES [Abstract] |
DERIVATIVES AND RISK MANAGEMENT ACTIVITIES | DERIVATIVES AND RISK MANAGEMENT ACTIVITIES We utilize various derivative instruments to: (i) manage our exposure to commodity price risk; (ii) manage our exposure to interest rate risk; and (iii) attempt to profit from market fluctuations. Our risk management policies and procedures are designed to monitor interest rates, futures and swap positions and over-the-counter positions, as well as physical volumes, grades, locations and delivery schedules, to help ensure that our hedging activities address our market risks. Our risk management committee oversees our trading controls and procedures and certain aspects of our commodity and trading risk management. Our risk management committee also reviews all new commodity and trading risk management strategies in accordance with our risk management policy, which was approved by our board of directors. Interest Rate Risk We are a party to certain interest rate swap agreements to manage our exposure to changes in interest rates. We enter into fixed-to-floating interest rate swap agreements associated with a portion of our fixed-rate senior notes. During the three months ended March 31, 2012, we entered into fixed-to-floating interest rate swap agreements with an aggregate notional amount of $200.0 million related to the 4.75% senior notes issued on February 2, 2012. Please refer to Note 4. Debt for additional information on the 4.75% senior notes. Under the terms of these interest rate swap agreements, we receive a fixed 4.75% and will pay a variable rate based on one month USD LIBOR plus a percentage that varies with each agreement. We account for our fixed-to-floating interest rate swaps as fair value hedges, and they qualify for the shortcut method of accounting. As a result, changes in the fair value of the swaps will completely offset the changes in the fair value of the underlying hedged debt. As of March 31, 2012 and December 31, 2011, the total aggregate notional amount of the fixed-to-floating interest rate swaps was $470.0 million and $270.0 million, respectively. The weighted-average interest rate that we paid under our fixed-to-floating interest rate swaps was 2.9% as of March 31, 2012. We are also a party to forward-starting interest rate swap agreements related to forecasted probable debt issuances. We entered into these swaps in order to hedge the risk of changes in the interest payments attributable to changes in the benchmark interest rate during the period from the effective date of the swap to the issuance of the forecasted debt. These swaps are designated and qualify as cash flow hedges. In connection with the issuance of the 4.75% senior notes on February 2, 2012, we terminated some of our outstanding forward-starting interest rate swap agreements with an aggregate notional amount of $225.0 million. We paid $25.4 million in connection with the terminations, which is being amortized into “Interest expense, net” over the life of the 4.75% senior notes. The termination payment is included in cash flows from financing activities on the consolidated statements of cash flows. As of March 31, 2012 and December 31, 2011, the total aggregate notional amount of the forward-starting interest rate swaps was $275.0 million and $500.0 million, respectively. Commodity Price Risk We are exposed to market risks related to the volatility of crude oil and refined product prices. In order to reduce the risk of commodity price fluctuations with respect to our crude oil and finished product inventories and related firm commitments to purchase and/or sell such inventories, we utilize commodity futures and swap contracts, which qualify and we designated as fair value hedges. We also enter into commodity swap contracts to hedge the price risk associated with the San Antonio refinery. These contracts fix the purchase price of crude oil and sales prices of refined products for a portion of the expected production of the San Antonio Refinery, thereby attempting to mitigate the risk of volatility of future cash flows associated with hedged volumes. These contracts qualify and we designated them as cash flow hedges. Derivatives that are intended to hedge our commodity price risk, but fail to qualify as fair value or cash flow hedges, are considered economic hedges, and we record associated gains and losses from such derivatives in net income. We also enter into commodity derivatives in order to attempt to profit from market fluctuations. These derivative instruments are financial positions entered into without underlying physical inventory and are not considered hedges. Changes in the fair values are recorded in net income. The volume of commodity contracts is based on open derivative positions and represents the combined volume of our long and short positions on an absolute basis, which totaled 42.3 million barrels and 27.8 million barrels as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, we had $6.6 million and $1.1 million, respectively, of margin deposits related to our derivative instruments. The fair values of our derivative instruments included in our consolidated balance sheets were as follows:
|  |  | Asset Derivatives |  | Liability Derivatives
| Balance Sheet Location |  | March 31, 2012 |  | December 31, 2011 |  | March 31, 2012 |  | December 31, 2011
|  |  | (Thousands of Dollars)
Derivatives Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |
Commodity contracts | Other current assets |  | $ | — |  |  | $ | 36,116 |  |  | $ | — |  |  | $ | (33,616 | )
Commodity contracts | Other long-term assets, net |  | 25,634 |  |  | 86,052 |  |  | (20,257 | ) |  | (66,175 | )
Interest rate swaps | Other long-term assets, net |  | 581 |  |  | 2,335 |  |  | — |  |  | — |
Commodity contracts | Accrued liabilities |  | 640 |  |  | — |  |  | (24,286 | ) |  | — |
Interest rate swaps | Accrued liabilities |  | — |  |  | — |  |  | (9,796 | ) |  | (22,009 | )
Commodity contracts | Other long-term liabilities |  | — |  |  | — |  |  | (5,665 | ) |  | — |
Interest rate swaps | Other long-term liabilities |  | — |  |  | — |  |  | (11,221 | ) |  | (27,190 | )
Total |  |  | 26,855 |  |  | 124,503 |  |  | (71,225 | ) |  | (148,990 | )
Derivatives Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |  |
Commodity contracts | Other current assets |  | 30,863 |  |  | 15,568 |  |  | (8,654 | ) |  | (5,956 | )
Commodity contracts | Other long-term assets, net |  | — |  |  | 7,207 |  |  | — |  |  | — |
Commodity contracts | Accrued liabilities |  | 21,831 |  |  | 519 |  |  | (36,377 | ) |  | (5,943 | )
Commodity contracts | Other long-term liabilities |  | — |  |  | — |  |  | (874 | ) |  | — |
Total |  |  | 52,694 |  |  | 23,294 |  |  | (45,905 | ) |  | (11,899 | )
Total Derivatives |  |  | $ | 79,549 |  |  | $ | 147,797 |  |  | $ | (117,130 | ) |  | $ | (160,889 | )
The earnings impact of our derivative activity was as follows:
Derivatives Designated as Fair Value Hedging Instruments |  | Income Statement Location |  | Amount of Gain (Loss) Recognized in Income on Derivative (Effective Portion) |  | Amount of Gain (Loss) Recognized in Income on Hedged Item |  | Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
|  |  |  | (Thousands of Dollars)
Three months ended March 31, 2012: |  |  |  |  |  |  |  |
Interest rate swaps |  | Interest expense, net |  | $ | 2,228 |  |  | $ | (2,228 | ) |  | $ | — |
Commodity contracts |  | Cost of product sales |  | (2,587 | ) |  | 2,390 |  |  | (197 | )
Total |  |  |  | $ | (359 | ) |  | $ | 162 |  |  | $ | (197 | )
Three months ended March 31, 2011: |  |  |  |  |  |  |  |
Interest rate swaps |  | Interest expense, net |  | $ | (5,914 | ) |  | $ | 5,960 |  |  | $ | 46 |
Commodity contracts |  | Cost of product sales |  | (12,066 | ) |  | 12,370 |  |  | 304 |
Total |  |  |  | $ | (17,980 | ) |  | $ | 18,330 |  |  | $ | 350 |
Derivatives Designated as Cash Flow Hedging Instruments |  | Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |  | Income Statement Location (a) |  | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |  | Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
|  | (Thousands of Dollars) |  |  |  | (Thousands of Dollars)
Three months ended March 31, 2012: |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 3,298 |  |  | Interest expense, net |  | $ | (423 | ) |  | $ | — |
Commodity contracts |  | (57,121 | ) |  | Cost of product sales |  | (7,344 | ) |  | 4,010 |
Total |  | $ | (53,823 | ) |  |  |  | $ | (7,767 | ) |  | $ | 4,010 |
Three months ended March 31, 2011: |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 2,878 |  |  | Interest expense, net |  | $ | — |  |  | $ | — |
(a) | Amounts are included in specified location for both the gain (loss) reclassified from accumulated other comprehensive income (OCI) into income (effective portion) and the gain (loss) recognized in income on derivative (ineffective portion).
Derivatives Not Designated as Hedging Instruments |  | Income Statement Location |  | Amount of Gain (Loss) Recognized in Income
|  |  |  | (Thousands of Dollars)
Three months ended March 31, 2012: |  |  |  |
Commodity contracts |  | Revenues |  | $ | 510 |
Commodity contracts |  | Cost of product sales |  | (4,318 | )
|  |  |  | $ | (3,808 | )
Three months ended March 31, 2011: |  |  |  |
Commodity contracts |  | Revenues |  | $ | 264 |
Commodity contracts |  | Cost of product sales |  | (15,629 | )
Commodity contracts |  | Operating expenses |  | 46 |
|  |  |  | $ | (15,319 | )
For derivatives designated as cash flow hedging instruments, once a hedged transaction occurs, we reclassify the effective portion from accumulated OCI to “Cost of product sales” or “Interest expense, net.” As of March 31, 2012, we expect to reclassify a loss of $24.3 million to “Cost of product sales” and a loss of $2.5 million to “Interest expense, net” within the next twelve months. The maximum length of time over which we are hedging our exposure to the variability in future cash flows is approximately three years for our commodity contracts and one year for our forward-starting interest rate swaps.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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